Mortgage Accelerator

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DEFINITION of 'Mortgage Accelerator'

A type of mortgage loan program popular in the United Kingdom and Australia that resembles the combination of a home equity loan and a checking account. Borrowers' paychecks are deposited directly into the mortgage account and the mortgage balance is reduced by that amount, then as checks are written against the account during the month, the mortgage balance rises. Any amount deposited in the account that is not withdrawn through the check writing process is applied to the balance of the mortgage at the end of the month as repayment of principal.

INVESTOPEDIA EXPLAINS 'Mortgage Accelerator'

The potential benefits of the mortgage accelerator program are that when the paycheck is deposited into the account, it reduces the average monthly outstanding principal balance of the mortgage on which interest is charged (interest accrues daily under the plan), even if that principal balance at the end of the month is equal to what it was at the beginning of the month. Additionally, the amount of the paycheck that remains in the account at the end of the month might be larger than what would be paid toward the principal balance of the mortgage under a traditional amortizing mortgage. When this is the case, principal is retired early, reducing the entire term of the mortgage, resulting in interest savings. The potential drawbacks of the mortgage accelerator loan program are that it might carry a higher interest rate than more traditional mortgages and that a borrower can accomplish the same early retirement of principal as described above, thereby shortening the life of the mortgage and realizing interest savings by making unscheduled principal payments on a traditional amortizing mortgage.